On Jan 11, German and U.S. stocks were heading in opposite directions. The Standard & Poor’s-500 index had gained 1%, while Germany’s DAX had dropped 0.9%.

But a measure of the tendency of two indices to move in sync, known as correlation, was signaling that they wouldn’t go in separate directions for much longer. Normally, the S&P 500 and the DAX move in similar directions—the average 22-day correlation, a measure of short-term moves, between the two markets during the past 10 years is 84%. (A correlation of 100% means two indices move in lockstep all the time; a correlation of -100% means they move in perfect opposition.)

But the 22-day correlation, a measure of short-term moves, had dropped to negative 54% on Jan 11, the weakest since April 1995. And when correlations reach extreme levels relative to history, it’s usually just a matter of time before they reverses direction.

That’s exactly what happened during the past month or so. Since the DAX hit a 2011 low on Jan 10, it has gained 7.7%, while the S&P 500 has gained up 5.8%. Both indices are up 6.8% for the year. And the correlation between the two has also reasserted itself with a vengeance: It’s now 97%, the highest since Sept. 22.

So what’s changed? With the European Union taking steps to backstop its weakest members, investors are finally putting money to work on the continent.

Thomson Reuters

The S&P 500 and Germany’s Dax are back moving together. Top lines are the two indexes, bottom graph shows change in correlation.

Don’t look now, but the yen looks like it’s making another run for the record books.

The U.S. dollar fell below 80.84 yen Monday afternoon and traded as low as 80.71 at one point, reaching yet another 15-year record. That puts the Japanese currency within striking distance of the 79.75 level reached 15 years ago, positioning the strengthening yen to venture into new territory.

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